Back in June 2017 we said that Pharma sector was undervalued because lot Pharma companies had received complaints from US FDA about regulatory, compliance issues about their manufacturing plants. Some companies like Divis Lab’s share price dropped like a rock.
Now just because the share price crashed does not mean you should buy it but if the company has good financials and if you can figure out if the problem due to which the price crashed is temporary then you should buy the shares.
With the above scenario if you notice insiders buying the shares as well then it confirms your analysis and its another confirmation signal when you buy.
Madhusudana Rao Divi who is a director bought 20,000 shares after the first price crash in late December.
Raja Divi bought 10,000 more some later after the second price crash.
Our Professional members get this information in an email which lists the insider buying and selling every day in the evening.
The share price chart gives a good picture when the insiders were buying.
There were around 6 months when the share price was bouncing around 700 Rs to 545 Rs, we kept on buying during that time with an average share price of 600 Rs. The current market price is 1300 Rs. 100% + return in 15 months.
A good company with some temporary problems with insider buying, all you have to do is buy and wait. The market will reward you eventually.
Disclosure – Long Divis Lab
The stock market is near peak bubble territory. Check the long term NSE PE Ratio chart to see what happened when the PE ratio touched 25. Of course this does not mean there will be crash soon, nobody can predict that but if you look at history then it would make sense not to invest right now.
The share price of most companies is overvalued right now finding good investment opportunities has become difficult but there is hope. Look at the NSE Sectoral Performance for the last 3 months.
Most of the sectors have given good returns except IT and Pharma. The companies in the Pharma sector have been facing tough times. Such adverse conditions are good news for patient value investors because investing in companies who have taken a beating gives enormous returns down the line. The only condition is you have to analyse which stocks to invest in that sector.
Companies like Sun Pharma, Lupin, Divis Lab, Dr Reddy’s which were once the darlings of Pharma sector have taken a significant beating. Most of Pharma companies faced the wrath of US FDA due to tighter regulations.
Despite the short term bad news, Pharma companies are not going anywhere, they have promised to fix all the regulatory issues. We believe it’s a good time to invest in the Pharma sector. Of Course there is always a possibility that the share price of Pharma companies can fall even more, if that happens you will get to buy them cheaper. You can check our charts, valuation models of the individual pharma companies to see which ones are fundamentally good or bad. If you don’t have the tenacity to do the research you can invest in a Pharma mutual fund.
So even though the market is overvalued there are some hidden gems provided you know where to find them.